Remarks by the Director of the Bank of Israel Research Department, Prof. Michel Strawczynski, at the annual conference of institutional investors
- Despite the delay in putting together a new government and the announcement of a new election campaign, economic activity remains strong. According to initial indicators, the economy continued to grow at close to its potential rate in November.
- Despite the expected restraint in government expenditure, at this stage, it appears that the economy will continue to grow at this pace in 2020 as well.
- In view of the signs of a renewed increase in home prices, it is important that the new government renew efforts to expand the supply of homes.
During a lecture at a conference of institutional investors in Eilat, the Director of the Bank of Israel Research Department, Prof. Michel Strawczynski, emphasized that despite the security incidents in November and the political uncertainty due to the decision on a third round of elections, economic activity in the business sector remains strong, and growth of both services exports and GDP continues. According to the sentiment index of the Business Tendency Survey for November, the economy continued to grow at a pace similar to the pace of potential growth—which is estimated at about 3 percent (Figure 1). While this is lower than the figure for September, another indicator from the Business Tendency Survey—the index of business sector product—shows that the growth rate of business sector product in November increased from 3.1 to 3.5 percent.
Strawczynski mentioned that in the Research Department's staff forecast for October, the growth forecast for 2020 was lowered, mainly as a result of the lower global growth forecast and the expectation that the government will need to make adjustments to the budget. At the beginning of January, the Department will publish a revised forecast that takes recent events in these areas into account.
In view of the fact that the elections will take place at the beginning of March, the government will operate for the first half of 2020 with an extension budget (1/12 of the previous year's budget per month), which means restraint in government expenditures. In recent months, budgetary performance of government ministries had already begun to noticeably converge to the annual budget framework. Between June and November 2019, the total expenditure of government ministries (relative to the multi-year seasonal path) declined or remained at the same level in all ministry groups – administrative, social, economic, defense, and miscellaneous expenses (Figure 2). The most prominent ministry group in terms of expenditure convergence is the economic ministries—which includes the Ministries of Agriculture, Energy and Water, Economy, Tourism, Communications, and Transportation. This means that the tendency to spend in recent months has been lower than what was customary in the parallel months in previous years, which will make it possible to avoid a greater deviation from the year-end deficit target relative to the current situation. As mentioned, the deficit in the past 12 months up to November is 3.7 percent of GDP, which is higher than the target of 2.9 percent of GDP.
Strawczynski also discussed recent developments in the housing market. For the first time since the government effort to increase the housing supply began, there was a decline of 0.75 percent in home prices in 2018. However, the trend has recently changed, and home prices have begun rising moderately. Strawczynski emphasized that it is important that the next government renew the efforts to increase supply, while returning to the positive trends in releasing land, increasing building permits, and higher building starts that prevailed until 2017.